Pensions UK has proposed a new framework for the pensions system to help more people get a better income in retirement, as the Pensions Commission deliberates major reforms for the sector.
In its response to a consultation following the Commission’s interim report, Pensions UK said it agreed with the panel’s assertion that “longer retirements, slower growth, and falling home ownership demand a renewed national settlement on pensions,” with higher contributions needed urgently to improve retirement outcomes.
Minimum adequacy threshold
At the heart of Pensions UK’s proposals is a framework that the government can use to determine whether the pensions system is helping people to save enough to live adequately in retirement.
As the Commission highlights, the absence of a unifying framework has had tangible consequences for policy development, making it inherently difficult to calibrate key system levers such as contribution rates, the role and level of the State Pension, and the interaction with the means-tested benefits system.
In response, Pensions UK supports the Commission’s call for a hybrid framework for measuring and setting retirement adequacy. The Pensions UK proposal is for a new approach that combines.
- A minimum income threshold: a level of absolute income that all individuals should reach, based around the well-established Retirement Living Standards. This will be measured as a proportion of median earnings.
- A set of target replacement rates (TRRs), to ensure that individuals with middle and higher incomes can achieve a level of income consistent with their pre-retirement living standards.
Pensions UK says a new and independent National Council for Retirement Adequacy should review the minimum adequacy threshold and wider pensions system, every five years.
We recommend government allows this independent Council to propose the level of the minimum income threshold. However, based on the historic values of the Minimum Retirement Living Standard for a couple, we would expect it to be around 32% of median earnings.
Due to individual circumstances such as living alone or renting, many people will need to save more to help them exceed this minimum income threshold.
State Pension
Pensions UK also includes proposals for the State Pension triple lock, which has successfully accelerated the uprating of the full State Pension, but without a defined end goal in sight. This has led to an ongoing, binary debate about whether to ‘maintain’ or ‘abolish’ the triple lock, which rarely engages with the question of what level the State Pension should actually reach.
While Pensions UK is not calling for an end to the triple lock now, once a minimum income threshold has been reached, a new ‘Living Standards Safeguard’ would offer a more stable, transparent and fiscally sustainable State Pension policy, while retaining a strong public commitment to protecting retirement living standards.
| Component of the new approach | Description | What this looks like in practice |
| Target level of the State Pension | The Triple Lock continues until the State Pension reaches or exceeds the minimum income threshold | The State Pension rises to at least 32% of median earnings |
| Earnings linking and inflation protection | From this point, the State Pension is uprated annually in line with the smoothed approach proposed by the IFS | The State Pension tracks earnings, and remains flat in real terms when prices are rising faster the earnings |
| Regular reviews | The National Council for Retirement Adequacy reviews the minimum income threshold every five years | At times when the State Pension no longer delivers the minimum income threshold, the Council recommends it is revalued |
This approach might be considered a ‘New Triple Lock’, in that it continues to index State benefits using three criteria – albeit these would lead to less aggressive and more predictable indexation. This approach is also rooted in a societal goal: helping people achieve a minimum standard of living.
Higher contributions
Minimum contribution rates through automatic enrolment are inadequate for most, and there is increasing inequity between those whose employer contributes at the minimum, and those with more generous settlements.
The answer to this is clear: minimum contribution rates need to rise. An independently-authored report published in June by Pensions UK, ‘Closing the gaps,’ underscores the adequacy improvements that would be delivered by higher rates and the trade-offs policymakers must face as they consider mitigations to protect lower earners from risks around affordability.
Our core adequacy proposal remains that the default minimum contribution rate should rise to 12%, with 6% being paid by the employee, and 6% by the employer.
Of the automatic enrolment system design proposals, this is the most urgent, and we are clear that it should be fully delivered (with contributions reaching 12%) by 2035 at the latest.
In line with our original proposals in Five Steps to Better Pensions, we propose that contribution increases should happen gradually, first reaching a total of 10% by ‘levelling up’ the employer contribution (by 2%) so that they match the current employee contribution of 5% – and second, by increasing both employer and employee contributions by a further 1% each to reach 12%.
Pensions savings for the self-employed
Pensions UK believes the self-employed remain one of the biggest gaps in the UK pensions system, with only 17% currently saving into a pension and we are calling for bold action to boost participation.
We would like to see serious engagement with and by HMRC to explore how the tax system could be deployed to get self-employed people saving: this will take concerted effort by relevant parts of Government to deliver serious and systematic cross-departmental collaboration and delivery. We are also supportive of trials exploring how digital tools and platforms that are commonly used by self-employed people could be used to support more systematic saving.
If this is done, the pensions industry will need to be ready to provide high quality, good-value products that will meet the needs of a new generation of self-employed savers.
Pensions UK stands ready to work with government and industry to develop practical, scalable solutions that help more self-employed people save for retirement.
“Today Pensions UK is calling for a clear national framework for retirement adequacy, with a minimum income threshold that gives policymakers, employers and savers a shared goal to work towards. The State Pension has a central role to play in protecting living standards and Government must provide clarity about how its value will be decided on over the longer term.
“More broadly, reform of the automatic enrolment system is now urgent. Around 18% of the working population are not currently on track to reach even the Minimum standard of living in retirement, while many more will fall short of a Moderate or Comfortable retirement. Contribution rates should rise gradually to 12% by 2035. Other system reforms should be advised on by a National Council for Retirement Adequacy, taking into account broader economic circumstances including cost of living pressures.
“The pensions industry is focused on maximising the value of every pound invested by savers, employers and the Government. But we cannot deliver retirement adequacy without system change to increase saving rates. Working together with Government, we see huge potential to deliver the economic and social benefits that will come from supporting the next generation of retirees to achieve the living standards they expect.”
Zoe Alexander, Executive Director of Policy and Advocacy at Pensions UK
